DP9132 Comparing behavioural and rational expectations for the US post-war economy

Author(s):	Chunping Liu, Patrick Minford
Publication Date:	September 2012
Keyword(s):	bank crisis, behavioural expectations, indirect inference, rational expectations
JEL(s):	E17, E37, E47
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=9132

The banking crisis has caused a resurgence of interest in behavioural models of expectations in macroeconomics. Here we evaluate behavioural and rational expectations econometrically in a New Keynesian framework, using US post-war data and the method of indirect inference. We find that after full reestimation the model with behavioural expectations is strongly rejected by the data, whereas the standard rational expectations version passes the tests by a substantial margin.